Can a law firm borrow from a bank to advance a client's litigation expenses and charge the client interest on those advances?

Plain-English summary

The opinion addresses a contingent-fee firm's proposed system for funding litigation costs: the firm draws on a bank line of credit secured by notes from its lawyers, pays the bank's interest as incurred, and recovers advanced expenses (and a portion of the interest) from the client when a case is paid, or bills the client if there is no recovery. The Board considers two questions: whether a firm may borrow to advance client expenses, and whether it may charge the client interest to defray the cost of the loan.

On the first question, the opinion starts from Rule 1.8(e), which generally bars financial assistance to clients in litigation but permits a lawyer to advance court costs and litigation expenses, with repayment contingent on the outcome. Because the proposed arrangement covers only such permitted expenses, and because the decision whether to pursue a client's liability for unrecovered expenses has always been within the lawyers' discretion, the opinion concludes that borrowing the funds rather than advancing them out of pocket does not make the arrangement impermissible.

The opinion adds two conditions tied to other rules. Reading Rules 1.5(c) and 1.8(e) together, the contingent fee contract must inform the client whether the client is responsible for the expenses even if there is no recovery; the correspondent's proposed contract did not. And the bank's involvement may not be allowed to affect the attorney-client relationship: the bank may not be made privy to client confidences or secrets (including client identity) or permitted to influence the lawyer's judgment, consistent with Rule 1.6.

On the second question, the opinion relies on State Disciplinary Board Advisory Opinion No. 45, which permits a lawyer to charge interest on overdue bills with advance notice, and finds no reason to treat advanced expenses differently. It concludes that a lawyer may charge lawful interest on such advances only if the contingent fee contract states the maximum rate the lawyer will or may charge, and the closing written statement to the client reflects the interest actually charged.

In practice

The opinion holds that, under Georgia Rules 1.8(e) and 1.5(c) as they stood at the time of the opinion, a contingent-fee firm may borrow to advance a client's permitted litigation expenses, and the source of the funds (a bank rather than the firm) does not matter so long as the bank relationship does not compromise the lawyer's obligations to the client. The opinion conditions charging interest on the client being notified in the fee contract of the maximum interest rate and on the closing statement reflecting the interest charged, and it requires the fee contract to state whether the client owes the expenses if there is no recovery.

The opinion states that the bank must understand its arrangement cannot affect or compromise the lawyer's obligations to the client, and it expresses no view on the applicability of O.C.G.A. 7-4-16 or the federal Truth in Lending and Fair Credit Billing Acts.

Common questions

Q: Can a law firm take out a bank loan to pay a client's litigation expenses?

A: Yes. The opinion concludes that Rule 1.8(e) permits advancing court costs and litigation expenses with repayment contingent on the outcome, and that borrowing the money rather than advancing it out of pocket does not make the arrangement impermissible.

Q: Can the firm charge the client interest on the advanced expenses?

A: Yes, lawful interest, but only if the contingent fee contract states the maximum rate the lawyer will or may charge and the client's closing statement reflects the interest actually charged. The opinion draws on Advisory Opinion No. 45, which allows interest on overdue bills with notice.

Q: Does the fee contract have to address what happens if there is no recovery?

A: Yes. The opinion holds that Rules 1.5(c) and 1.8(e) together require the contingent fee contract to inform the client whether the client is responsible for the expenses even if there is no recovery.

Q: Can the bank learn who the clients are or influence the case?

A: No. The opinion concludes the bank may not be made privy to client confidences or secrets, including client identity, or permitted to affect the lawyer's judgment, and the lawyer must ensure the bank understands its arrangement cannot compromise the lawyer's duties under Rule 1.6.

Background and rules framework

The opinion interprets Georgia Rule of Professional Conduct 1.8(e) (financial assistance to clients in litigation; Model Rule 1.8(e)), Rule 1.5(c) (contingent fee agreements and closing statements; Model Rule 1.5(c)), and Rule 1.6 (confidentiality; Model Rule 1.6). It relies on State Disciplinary Board Advisory Opinion No. 45 (1985) on charging interest, and references O.C.G.A. 7-4-16 and the federal Truth in Lending and Fair Credit Billing Acts without opining on their applicability. This opinion replaced the earlier FAO 92-1.

Citations and references

Rules of Professional Conduct:

• Georgia RPC 1.8(e) (advancing litigation expenses) / Model Rule 1.8(e)
• Georgia RPC 1.5(c) (contingent fee agreements and closing statements) / Model Rule 1.5(c)
• Georgia RPC 1.6 (confidentiality of information) / Model Rule 1.6

Statutes:

• O.C.G.A. 7-4-16 (interest on commercial accounts); federal Truth in Lending and Fair Credit Billing Acts, 15 U.S.C. 1601 et seq. (applicability not decided)

Other opinions cited:

• State Disciplinary Board Advisory Opinion No. 45 (1985): charging interest on overdue bills with notice

See also

• ABA Formal Op. 484: Lawyers and Client Fee-Financing Companies
• ABA Formal Op. 93-379: Billing for Fees and Expenses
• ALA Ethics Op. 2005-02: Billing Clients for Fees, Costs, and Expenses

Source

• Landing page: https://www.gabar.org/handbook?rule=rule457

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Click here for an explanation regarding the history of this opinion.

STATE BAR OF GEORGIA
FORMAL ADVISORY OPINION NO. 05-5
Approved And Issued On February 13, 2007 Pursuant To Bar Rule 4-403
By Order Of The Supreme Court Of Georgia Thereby Replacing FAO No. 92-1
Supreme Court Docket No. S06U0798

QUESTION PRESENTED:

1) Ethical propriety of a law firm obtaining a loan to cover advances to clients for litigation expenses;

2) Ethical considerations applicable to payment of interest charged on loan obtained by law firm to cover advances to clients for litigation expenses.

OPINION:

Correspondent law firm asks if it is ethically permissible to employ the following system for payment of certain costs and expenses in contingent fee cases. The law firm would set up a draw account with a bank, with the account secured by a note from the firm's individual lawyers. When it becomes necessary to pay court costs, deposition expenses, expert witness fees, or other out-of-pocket litigation expenses, the law firm would obtain an advance under the note. The firm would pay the interest charged by the bank as it is incurred on a monthly or quarterly basis. When a client makes a payment toward expenses incurred in his or her case, the amount of that payment would be paid to the bank to pay down the balance owed on his or her share of expenses advanced under the note. When a case is settled or verdict paid, the firm would pay off the client's share of the money advanced on the loan. If no verdict or settlement is obtained, the firm would pay the balance owed to the bank and bill the client. Some portion of the interest costs incurred in this arrangement would be charged to the client. The contingent fee contract would specify the client's obligations to pay reasonable expenses and interest fees incurred in this arrangement.

The first issue is whether it is ethically permissible for lawyers to borrow funds for the purpose of advancing reasonable expenses on their clients' behalf. If so, we must then determine the propriety of charging clients interest to defray part of the expense of the loan.

In addressing the first issue, lawyers are generally discouraged from providing financial assistance to their clients. Rule 1.8(e) states:

A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; or

(2) a lawyer representing a client unable to pay court costs and expenses of litigation may pay those costs and expenses on behalf of the client.

Despite that general admonition, contingent fee arrangements are permitted by Rule 1.5(c), which states:

(1) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated.

(2) Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the following:

(i) the outcome of the matter; and,

(ii) if there is a recovery, showing the:

(A) remittance to the client;
(B) the method of its determination;
(C) the amount of the attorney fee; and
(D) if the attorney's fee is divided with another lawyer who is not a partner in or an associate of the lawyer's firm or law office, the amount of fee received by each and the manner in which the division is determined.

The correspondent's proposed arrangement covers only those expenses which are permitted under Rule 1.8(e). Paragraph (e) of Rule 1.8 eliminates the former requirement that the client remain ultimately liable for financial assistance provided by the lawyer and further limits permitted assistance to cover costs and expenses directly related to litigation. See Comment (4) to Rule 1.8.

The arrangement also provides that when any recovery is made on the client's behalf, the recovery would first be debited by the advances made under the note, with payment for those advances being made by the firm directly to the bank. The client thus receives only that recovery which remains after expenses have been paid. The client is informed of this in correspondent's contingent fee contract, which states that "all reasonable and necessary expenses incurred in the representation of said claims shall be deducted after division as herein provided to compensate attorney for his fee."

In the case where recovery is not obtained, however, the lawyers themselves are contractually obligated to pay the amount owed directly to the bank. Correspondent's proposed contract as outlined in the request for this opinion does not inform the client as to possible responsibility for such expenses where there is no recovery. It is the opinion of this Board that Rules 1.5(c) and 1.8(e), taken together, require that the contingent fee contract inform the client whether he is or is not responsible for these expenses, even if there is no recovery.

Although the client may remain "responsible for all or a portion of these expenses,"decisions regarding the appropriate actions to be taken to deal with such liability are entirely within the discretion of the lawyers. Since this discretion has always existed, the fact that the lawyers have originally borrowed the money instead of advancing it out-of-pocket would seem to be irrelevant, and the arrangement is thus not impermissible.

The bank's involvement would be relevant, however, were it allowed to affect the attorney-client relationship, such as if the bank were made privy to clients' confidences or secrets (including client identity) or permitted to affect the lawyer's judgment in representing his or her client. See generally, Rule 1.6. Thus, the lawyer must be careful to make sure that the bank understands that its contractual arrangement can in no way affect or compromise the lawyer's obligations to his or her individual clients.

The remaining issue is whether it is ethically permissible for lawyers to charge clients interest on the expenses and costs advanced via this arrangement with the bank. As in the first issue, the fact that the expenses originated with a bank instead of the law firm itself is irrelevant, unless the relationship between lawyer and bank interferes with the relationship between lawyer and client. Assuming it does not, the question is whether lawyers should be permitted to charge their clients interest on advances.

In Advisory Opinion No. 45 (March 15, 1985, as amended November 15, 1985), the State Disciplinary Board held that a lawyer may ethically charge interest on clients' overdue bills "without a prior specific agreement with a client if notice is given to the client in advance that interest will be charged on fee bills which become delinquent after a stated period of time, but not less than 30 days."Thus, the Board found no general impropriety in charging interest on overdue bills. There is no apparent reason why advanced expenses for which a client may be responsible under a contingent fee agreement (whether they are billed to the client or deducted from a recovery) should be treated any differently. Thus, we find no ethical impropriety in charging lawful interest on such amounts advanced on the client's behalf. [1]

In approving the practice of charging interest on overdue bills, the Board held that a lawyer must comply with "all applicable law [1] . . . and ethical considerations."

The obvious intent of Rule 1.5(c) is to ensure that clients are adequately informed of all relevant aspects of contingent fee arrangements, including all factors taken into account in determining the amount of their ultimate recovery. Since any interest charged on advances could affect the ultimate recovery as much as other factors mentioned in Rule 1.5(c), it would be inconsistent to permit lawyers to charge interest on these advances without revealing the intent to do so in the fee contract. Thus, we conclude that it is permissible to charge interest on such advances only if (i) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances; and (ii) the written statement given to the client upon conclusion of the matter reflects the interest charged on the expenses advanced in the matter.

1. The opinion makes specific mention of O.C.G.A. 7-4-16, the Federal Truth in Lending and Fair Credit Billing Acts in Title I of the Consumer Credit Protection Act as amended (15 USC 1601 et seq.). We state no opinion as to the applicability of these acts or others to the matter at hand.